Friday, November 30, 2012

It's The Economy Stupid: Income & Spending

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Personal Income

OCT

0.2%

0.0%

0.4%

 

Personal Spending

OCT

0.0%

-0.2%

0.8%

 

PCE Deflator MoM

OCT

0.1%

0.1%

0.4%

0.3%

PCE Deflator YoY

OCT

1.8%

1.7%

1.7%

1.6%

PCE Core MoM

OCT

0.2%

0.1%

0.1%

 

PCE Core YoY

OCT

1.7%

1.6%

1.7%

1.6%

 

There are so many references to SuperStorm Sandy in this release it’s hard to determine what’s real and what’s not real.

 

Clearly Personal Income is stagnant, and that certainly is not good.

 

Once again Personal spending has gone negative, and that certainly is not good.

 

And as for the PCE (Personal Consumption Expenditure) numbers, the 1.7% PCE Deflator and the 1.6% PCE Core numbers are well below the Fed’s 2.0% target, and have been consistently below target for the last four (4) years.  That certainly is not good.

 

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

Thursday, November 29, 2012

The Fiscal Cliff Award For Candor

One Sentence Perfectly Describes The Quandary On Three Continents – The ultimate award for candor and honesty must go to Jean-Claude Junker (Prime Minister of Luxembourg) who apparently said – "We all know what to do, we just don't know how to get re-elected after we have done it."

 

That just about says it all.

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

It's The Economy Stupid: GDP & Jobless Claims

Quarterly GDP number revised upward, that’s a good thing

Jobless Claims down from previous week, that’s a good thing too

 

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

GDP QoQ Annualized

3Q S

2.8%

2.7%

2.0%

 

Personal Consuption

3Q S

1.9%

1.4%

2.0%

 

GDP Price Index

3Q S

2.8%

2.7%

2.8%

 

Core PCE QoQ

3Q S

1.3%

1.1%

1.3%

 

Initial Jobless Claims

NOV 24

390K

393K

410K

416K

Continuing Claims

NOV 17

3325K

3287K

3337K

3357K

 

The economy in the U.S. expanded more than previously estimated in the third quarter as a narrower trade deficit and gains in inventory overshadowed a

smaller gain in consumer spending.  Gross domestic product grew at a 2.7 percent annual rate, up from a 2 percent prior estimate. The number was juiced upward largely by increases in Government spending, because consumer spending actually decreased.  Household purchases climbed at a 1.4 percent rate,

the least in more than a year and down from a previously reported 2 percent rate, and income gains were also cut.

 

Applications for jobless benefits decreased by 23,000 to 393,000 in the week ended Nov. 24. Economists forecast 390,000 claims, according to the median estimate in a Bloomberg survey.  Fewer Americans filed first-time claims for unemployment insurance payments last week as the labor market disruptions wrought by SuperStorm Sandy ebbed.

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

Wednesday, November 28, 2012

It's The Economy Stupid: Bridgewater on Divergence of Consumer & Businesses

Here is a brief blurb from Bridgewater and the divergence between Consumer Confidence and Cap Goods

 

As we have discussed, restrained business spending has been a drag on the US and global economy, even as consumer demand seems to have improved.  Business spending is an important source of total demand but is largely taken in response to demand from customers.  Since this summer, the slowdown in business spending was to be expected given the weakening of US and global demand.  But in recent months, US consumer spending seems to have picked up.  Despite this pickup, business spending has remained weak, surveys of capital expenditure intentions are mixed, and earnings season commentaries indicate ongoing worry about economic conditions.  This sort of divergence between the spending of businesses and the activity of their customers typically does not last long.  The longer it lasts, the more it calls into question whether demand is actually improving (since businesses see their own sales daily), or the more it suggests that business spending is about to turn and provide a secondary boost to growth.  Tuesday’s stats mostly showed this gap persisting, with the durable goods report showing core capital goods orders improving some from a very weak growth rate while the Conference Board consumer confidence measure ticked up to a post-crisis high.  The rubber band between consumers and businesses has been stretched, and it is not yet clear which way the divergence will be resolved, though the odds still favor an improvement in business spending that will reinforce the pickup in growth.

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

Tuesday, November 27, 2012

It's The Economy Stupid: Durabable Goods, Cap Goods, All Kinds of Goods

Doom and Gloomers take one in the chops.

 

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Durable Goods Orders

OCT

-0.7%

0.0%

9.9%

9.2%

Durables Ex Transportation

OCT

-0.5%

1.5%

2.0%

1.7%

Cap Goods Orders Non Def Ex Air

OCT

-0.5%

1.7%

0.0%

-0.4%

Cap Goods Ship Non Def Ex Air

OCT

-2.1%

-0.4%

-0.3%

-0.3%

 

Okay, this ain’t a great set of numbers, and really, it’s barely treading water for a minimal growth economy, but they indicate that the U.S. economy ain’t going in the tank.  So, we aren’t Europe.  Or at least not yet. 

 

And yes, I realize I used “ain’t” twice.

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

Wednesday, November 21, 2012

It's The Economy Stupid: The Jobless

First and foremost, Happy Thanksgiving!

 

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Initial Jobless Claims

NOV 16

410K

410K

439K

451K

Continuing Claims

NOV 17

3345K

3337K

3334K

3367K

 

SANDY, SANDY, SANDY

 

Fewer Americans filed applications for unemployment benefits last week as damage to the labor market caused by SuperStorm Sandy began to subside.  Jobless claims decreased by 41,000 to 410,000 in the week ended Nov. 17.  The number of applications matched the median forecast of 48 economists surveyed by Bloomberg.  The level of claims reflects the economic drag associated with Sandy, which left about 8 million homes and businesses without power for days.  Applications in New York during the week ended Nov. 10 jumped 43,956 and those in New Jersey surged 31,094. Those data are reported with a one-week lag. Forty states and territories showed an increase in claims, while 13 reported a decrease.

    

The four-week average, a less volatile measure than the weekly figures, rose to 396,250 from 386,750.  Economists’ estimates for claims last week ranged from

365,000 to 500,000. Claims in the previous week were revised to 451,000 from a previously reported 439,000.

 

                        

 

 

Tuesday, November 20, 2012

It's The Economy Stupid: Housing, Building, The FHA In Deep Do Do

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Housing Starts

OCT

840K

894K

872K

863K

Housing Starts MoM%

OCT

-3.7%

3.6%

15.0%

15.1%

Building Permits

OCT

864K

866K

894K

890K

Building Permits MoM%

OCT

-2.9%

-2.7%

11.6%

11.1%

 

 

THE POLITICS OF HOUSING

 

The Wall Street Journal.

November 20, 2012, Page A14

The Latest Taxpayer Housing Bust

With the election over, we learn that the FHA is insolvent.

 

Vindication is overrated, especially in a losing cause, so it brings no satisfaction to have predicted that the Federal Housing Administration would sooner or later threaten taxpayers. That day has arrived. Safely past the election, the feds announced Friday that the FHA's liabilities exceed its assets by at least $16.3 billion—and the gap could reach $93.7 billion in the worst case.

 

Yet it's worth recalling that when we warned about FHA's troubles in September 2009, we got an accounting lecture from HUD Secretary Shaun Donovan and a letter from FHA Commissioner at the time, David Stevens, that we were "just plain wrong." He added that, "I can say undoubtedly that the FHA fund is playing a key role in the housing recovery and poses no immediate risk to the American taxpayer."

 

Taxpayers will "undoubtedly" be pleased to know that the threat wasn't "immediate" but arrived a mere three years later. Can taxpayers claw back the salaries of Messrs. Donovan and Stevens the way Congress has tried to do with those of financial CEOs?

 

The Administration is trying to spin the FHA's troubles as one more result of the housing bust, which is true but disingenuous. Fannie Mae FNMA 0.00%and Freddie Mac FMCC -4.44%went belly up in 2008 because of the housing boom and bust. At the time, the FHA was in relatively good shape because it had played a minor role during the housing mania.

 

The FHA got into trouble because it deliberately expanded in 2007-2009 even as the market was crashing. As Mr. Donovan likes to say, the FHA was steered to play "an important countercyclical role in the housing market." The point was to ramp up FHA's loan-guarantee business to prop up housing prices as much as possible during the bust.

 

While this helped the Obama Administration politically, it arguably prolonged the recovery by failing to let prices find a bottom. Meanwhile, FHA's boom put taxpayers on the hook for tens of billions worth of dubious loans made at the most dubious time. Those are the loans now going bust. According to the new HUD report, FHA loans insured between fiscal 2007 and 2009 "continue to place a significant strain on the [single-family mortgage insurance] Fund and are expected to reach a total of $70 billion in claims."

 

The ugly math: 25.82% of FHA's 2007 loans, 24.88% of its 2008 loans, and 12.18% of its 2009 loans were seriously delinquent as of June 30. The American Enterprise Institute's Ed Pinto, who also predicted the FHA debacle, estimates that 17.3% of all FHA loans were delinquent as of September 30. That's about one in six loans.

 

Most businesses would look at these losses and flee such a market. But the FHA, which responds to political rather than market incentives, has literally tried to make it up on volume. In recent years, the FHA has expanded to insure higher-quality loans that by law were supposed to be the preserve of private lenders.

 

While fewer of these loans are delinquent, the greater lending has caused the FHA's capital ratio to shrink below its 2% minimum mandated by law. In 2009, the agency had $685 billion insurance in force and a capital reserve of 0.53%. Today it has $1.1 trillion in force and capital reserves are a negative 1.44%.

 

The FHA says its risk models were broken, it was too optimistic about housing prices, and it didn't expect low interest rates to persist. (Low interest rates hurt FHA finances because good borrowers refinance.) If current low interest rates were used in HUD's model, the forecast losses in FHA's single-family business would be $31.1 billion, not $13.5 billion.

 

You will not be reassured to know that HUD claims that all of this is merely temporary. The FHA says it doesn't currently need a Treasury bailout because it will reduce its losses by raising insurance premiums, expanding short sales, selling some of its distressed loans and helping troubled borrowers modify their mortgages. That's nice, but why wasn't it doing this already?

 

In any case, this sunny HUD scenario will only hold if the economy grows faster and the housing market continues to improve. If there's another recession, taxpayers are looking at a Fannie Mae-level bath.

 

The FHA is another case study in how government programs sold with the best intentions are inevitably corrupted. FHA was founded in 1934 to help lower- to middle-income and first-time home buyers obtain a mortgage, but its mission expanded over the years as the housing lobby sought to channel ever more taxpayer-guaranteed money into housing. When the agency opened, its minimum down payment was a prudent 20%. In the 1960s, that number fell to 10%, and now it's 3.5%.

 

The other issue is accountability. As government program after government program fails, no one takes responsibility. Fannie and Freddie hit taxpayers for $138 billion, the Post Office loses $15.9 billion, and now the FHA is insolvent. We weren't kidding about those salary clawbacks.

 

--------------------------------------------------

 

A version of this article appeared November 20, 2012, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: The Latest Taxpayer Housing Bust.

 

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Monday, November 19, 2012

It's The Economy Stupid: Investment Falls Off a Cliff

*** The below/attached WSJ article is making the rounds this morning and is an interesting and useful summary of recent announcements of scaled back capital expenditure plans from many of the largest firms in the US. "Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls." Suggests significant near-term headwinds for the US (and global) economy in the New Year. ***

 

-------------------------------------------------------------------------------

 

 

WSJ: Investment Falls Off a Cliff

U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty By SUDEEP REDDY and SCOTT THURM

 

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

 

Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

 

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

 

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.

 

Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. It is unclear whether Washington will avert the so-called fiscal cliff, tax increases and spending cuts scheduled to begin Jan. 2.

 

Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits. A deal to avert the cliff could include tax-code changes, such as revamping tax breaks or rates, that hurt specific sectors.

 

President Barack Obama called a number of business executives over the weekend, including Warren Buffett, Apple Inc. AAPL +0.39%Chief Executive Tim Cook and J.P. Morgan Chase's JPM +0.36%James Dimon, to promote his solution to the looming budget crisis. All sides in Washington, in a departure from a year of deep divisions, have pledged to work together and compromise to avoid going over the cliff.

 

"The whole world is looking for stability and clarity from the United States," said David Seaton, chief executive of Fluor Corp., FLR -0.17%a large engineering and construction firm. If uncertainty isn't removed, he said, "people will sit on their war chests of cash and return it to shareholders. You'll have a retarded growth trajectory."

 

Should the White House and Congress strike a deal to avoid the fiscal cliff, the economy could get a boost. "You might very well get a burst of pent-up demand coming at the start of next year," said Paul Ashworth, chief U.S. economist at Capital Economics, a consultancy.

 

"Given the timing of the drop-off in business investment," he said, "you have to think it's not just a coincidence with the timing of the fiscal cliff."

 

Unless the business investment slowdown reverses quickly, it could weigh further on growth prospects and the stock market.

 

Collectively, the members of the Standard & Poor's 500-stock index spent $580 billion on plants and equipment in 2011, according to calculations by the Journal from data supplied by S&P Capital IQ. Spending has run ahead of that pace throughout the year but has slowed in recent months. The latest retrenchment includes such household names as Wal-Mart Stores Inc., WMT -1.00%Ford Motor Co., F -0.66%Boeing Co., BA -0.38%Intel Corp. INTC +0.80%and Walt Disney Co. DIS -0.11% During the 2007-09 recession, businesses cut back sharply on all kinds of spending. But investment helped propel the recovery, growing faster than the rest of the economy from the second half of 2009, once the recession ended, through the first half of this year. That helped many companies boost productivity and profits without adding new workers.

 

The pattern changed in the third quarter, when business investment fell at a seasonally adjusted annual rate of 1.3%, according to a preliminary estimate from the Commerce Department. The latest drop included a decline in investment in structures, such as buildings, at a 4.4% annual rate. Investment in equipment and software stalled after growing at a roughly 5% annual pace in the first six months of the year.

 

"We have really not seen tailwinds to the economy," said OfficeMax Inc. OMX +12.03%chief executive Ravi Saligram. "When that happens, American businesses focus on productivity. You always prepare for the worst and if things get better, that's great."

 

The slowdown in capital spending contrasts with a rebound in U.S. consumer spending and confidence, which has returned to a five-year high. Meanwhile, the latest survey by the Business Roundtable, which tracks expectations for sales and investment among its big-company CEOs, found the worst sentiment about the economic outlook in three years.

 

Consumers may be taking their cues from signs of stronger job growth, lower fuel prices and an improving housing market. Businesses, on the other hand, appear more worried about the future, as profit growth and the global economy slow and the outlook for U.S. government policies remains murky.

 

The mood appears better among small businesses than large corporations. A survey by the National Federation of Independent Business in October found an uptick in capital spending among small businesses. While overall sentiment among small businesses remains below its prerecession average, it has been resilient in recent months.

 

Snap-on Inc., SNA +0.82%which makes equipment for auto technicians, reports healthy investment among the 800,000 small businesses it serves across the U.S. "Their confidence is fair and reasonable," said Snap-on CEO Nicholas Pinchuk. "As you move up to bigger companies, their foresight becomes broader and their confidence starts to erode."

 

Slower global economic growth also is contributing to the investment slowdown. China for example, has reduced demand for coal and other minerals, slowing orders for earth-moving and other equipment from Caterpillar Inc. CAT +0.77% At the start of the year, Caterpillar expected to spend $4 billion building and expanding factories in Illinois, North Carolina, Texas, China and Thailand, among others. Last month, Caterpillar said it wouldn't reach that target, and expects capital spending to fall next year.

 

In technology, Intel is facing lower demand for its semiconductors. Intel last month said it would shift idle factory space and equipment into producing its newest chips, reducing its capital spending this year to roughly $11.3 billion, from an earlier projection of $12.5 billion. Chief Financial Officer Stacy Smith told investors last month that spending could fall again next year.

 

Other semiconductor companies buying less new equipment include Texas Instruments Inc. TXN -1.63%and Harris Corp., HRS +0.26%which has cut capital spending by 46% so far this year, to $44 million from $82 million. Apple said it planned to spend $10 billion on new stores and equipment in the current fiscal year ending Sept. 30, 2013, down from $10.3 billion in the 2011-2012 fiscal year.

 

Among the companies cutting capital-spending targets, the biggest concentration is in the energy industry, where natural-gas prices are near record lows.

 

Devon Energy Corp. DVN -0.15%spent $6.2 billion in the first nine months of this year, up 13% from the same period last year, with boosted spending on oil projects.

 

But capital spending next year will be "significantly less than 2012," particularly in acquiring new leases, Devon chief executive John Richels told analysts.

 

 

 

Friday, November 16, 2012

It's The Economy Stupid: Manufacturing & Production. Going down. Down, down, down, down, down.

Pardon my Jeff Beck reference, but the Manufacturing & Production numbers really are going down.

 

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Industrial Production

OCT

0.2%

-0.4%

0.4%

0.2%

Capacity Utilization

OCT

78.3%

77.8%

78.3%

78.2%

Manufacturing Production

OCT

0.2%

-0.9%

0.2%

0.1%

 

Industrial Production in the U.S. unexpectedly declined in October as SuperStorm Sandy knocked out power in the Northeast.  Output at factories, mines and utilities dropped to -0.4 percent last month after a revised 0.2 percent increase in September that was smaller than previously estimated.  Economists forecast a

0.2 percent gain, according to the Bloomberg survey median. The Fed said the storm cut total production by almost 1 percentage point.

 

Manufacturing Production, which makes up 75 percent of total production, slumped 0.9 percent last month, matching August as the biggest decrease since May 2009. Factory output excluding the effects of Sandy was about unchanged in October from the prior month, the Fed said.  Estimates of the 84 economists surveyed by Bloomberg for overall production ranged from a 0.3 percent decrease to a 0.6 percent gain. September’s figure was previously reported as a

0.4 percent increase.

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

Thursday, November 15, 2012

It's The Economy Stupid: Philly Fed Business Outlook

The Philadelphia Fed Business Outlook Survey for November dropped -10.7, far worse than a Bloomberg survey of economists’ estimates which came in at +2.0.  The Philly Fed survey in October was +5.7.  It’s kind of hard to determine how much of this can be attributed to SuperStorm Sandy and how much can be attributed to the fiscal cliff.  It definitely is not a good number.

 

 

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

 

It's The Economy Stupid: It's SuperStormSandy's Fault

INITIAL JOBLESS CLAIMS JUMP TO 439 THOUSAND!!!  SUPERSTORM SANDY NEW SCAPEGOAT.

 

Economic Event

Period

Economic Survey

Actual Reported

Original Prior

Revised Prior

Consumer Price Index MoM

OCT

0.1%

0.1%

0.6%

 

CPI Ex Food & Energy MoM

OCT

0.1%

0.2%

0.1%

 

Consumer Price Index YoY

OCT

2.1%

2.1%

2.0%

 

CPI Ex Food & Energy YoY

OCT

2.0%

2.0%

2.0%

 

Consumer Price Index NSA

OCT

231.327

231.32

231.407

 

CPI Core Index SA

OCT

 

230.99

230.580

 

Empire Manufacturing

OCT

-8.00

-5.22

-6.16

 

Initial Jobless Claims

NOV 3

375K

439K

355K

361K

Continuing Claims

OCT 27

3181K

3334K

3127K

3163K

 

Consumer Price Index

 

The cost of living rose in October at the slowest pace in three months, a sign U.S. inflation is in check.  The 0.1 percent increase in the consumer-price index

followed a 0.6 percent gain the prior month.  The median estimate of 83 economists surveyed by Bloomberg called for a 0.1 percent rise. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.2 percent, more than projected, reflected rising rents and clothing costs.

 

Empire Manufacturing

 

Manufacturing in the New York region contracted for a fourth straight month in November as SuperStorm Sandy knocked out electrical power and limited activity.

The Federal Reserve Bank of New York’s general economic index was minus 5.2 this month after minus 6.2 in October. The median forecast of 55 economists in a Bloomberg survey called for minus 8. Readings of less than zero signal contraction in New York, northern New Jersey and southern Connecticut.  Power outages and destruction in New Jersey and New York from Sandy placed a temporary burden on the region’s factories, which have been challenged by a recession in Europe and slower Asian economies. Companies have limited orders to factories as they pull back on equipment investment on concern lawmakers will fail to avoid the fiscal cliff -- a package of automatic tax increases and spending cuts set to take effect early next year.

 

Jobless Claims

 

More Americans than forecast submitted claims for unemployment insurance last week as SuperStorm Sandy also wreaked havoc on the job market.       Applications for jobless benefits surged by 78,000 to 439,000 in the week ended Nov. 10, the most since April 2011. Several states said the increase was due to the storm that hit the Northeastern part of the U.S. in late October, a Labor Department spokesman said as the data were released to the press.  The extent of the damage means it may take weeks for the underlying trend in firings to again become clear. Before the storm, the labor market was gaining momentum even as year-end domestic fiscal policy uncertainties raised concern among businesses.